Implementation of the CPRS
The cost of carbon emissions under the cap and trade mechanism will be determined by the price of carbon credits, known as Eligible Emission Units (EEU). Under CPRS there will be two categories of EEUs:
- An Australian emissions unit (AEU); and
- An eligible international emissions unit (EIEU)
In order for an entity to comply with the CPRS framework, the number of these EEUs that must be surrendered will be based on the amount of carbon that an entity produces during the year. AEUs will be issued by the Australian Climate Change Regulatory Authority (the Authority). The number of AEUs issued will be limited by Australia's national scheme cap. The authority will supply the AEUs to the market via an auction process as well as the provision of free AEU to certain industries.
EIEUs are carbon credits that have been created as a result of actions performed under the Kyoto protocol. For example, a certified emission reduction (a type of EIEU) is defined as a certified emission reduction issued outside Australia in accordance with the relevant provision of the Kyoto rules.
If an entity has too few or too many EIEUs they will be able to acquire and sell them through secondary markets.
Australia's Greenhouse gas emission objective is to cut emissions by 5 per cent with a possible reduction of up to 15 per cent below 2000 levels by 2020. Additionally, the Government has committed to reduce Australia's carbon pollution to 25 per cent below 2000 levels by 2020 if the world agrees to stabilise levels of greenhouse gases in the atmosphere at 450 parts per million CO2-equivalent or lower. Furthermore, the commitment is to reduce emissions by 60 per cent below 2000 levels by 2050.
Is reporting mandatory?
The NGER Act makes reporting mandatory for Australian entities that have carbon emissions above the established thresholds. These entities are required to report annually on their greenhouse gas emissions, energy consumption and production.
How will the information be used?
Information reported under the NGER Act will play a critical role in determining the allocation of free permits to Emissions Intensive Trade Exposed (EITE) industries.
Data reported under the NGER Act will inform decision making during the establishment and ongoing implementation of the CPRS, to assist Australia in meeting its international reporting obligations and inform government policy, programs and the Australian public. The NGER Act has also established the Greenhouse and Energy Data Officer (GEDO) as the regulatory and administrative decision maker under the Act.
The reporting system is expected to cover up to 1000 large and medium entities, of which approximately 300 will be reporting for the first time. The NGER Act requires entities to register and report if they exceed the greenhouse gas emission, energy production or consumption thresholds within a given financial year.
When will it come into effect?
From 1 July 2008 all controlling entities must apply for registration with the GEDO if their group emits greenhouse gases, or produces or consumes energy at or above the specified thresholds for a financial reporting year. The latest date of registration for entities that fall at or above the current threshold is the 31 August, 2009.
What are the NGER thresholds?
Entities need to be aware of the thresholds contained within the NGER Act for both a facility and the entity. The facility and entity are the two levels at which entities are required to register and report.
Figure 1: Thresholds and timelines for the National Greenhouse and Energy Reporting System. An entity or facility must report when it emits greenhouse gases, produces or consumes energy, at or above the specified quantity per financial year.
What do you need to do?
The first annual reporting period under the NGER Act starts on 1 July 2008. Entities first need to determine if they are required to report under the Act. The entities will then need to:
- Define the appropriate entity structure, including accountability and responsibility for reporting;
- Determine their obligation for reporting which may arise from joint ventures or partnerships;
- Assess the entity's readiness to capture relevant data relating to greenhouse gas emissions, energy production and consumption. The NGER Act may require a new reporting regime; and
- Register with the Greenhouse and Energy Data Officer by 31 August 2009 for the report period commencing 1 July 2008.
Accounting implications of the CPRS
The implementation of Australia's Carbon Pollution Reduction Scheme (CPRS) will result in entities having to consider how to account for emissions permits. The Government's White Paper on CPRS does not prescribe specific accounting treatments and has deferred the issue until the International Accounting Standards Board (IASB) provides specific guidance. The IASB expects to release an Exposure Draft in late 2009 and issue an Accounting Standard in the second half of 2010. It is expected that the guidance released by the IASB will affect current Australian accounting standards including:
- AASB 136 Impairment of Assets
- AASB 138 Intangible Assets
- AASB 139 Financial Instruments: Recognition and Measurement
- AASB 120 Accounting for Government Grants and Disclosure of Government Assistance
A possible major effect will be on the cash flows generated by carbon producing assets as entities will be required to acquire carbon credits which may affect their value-in-use valuation models. This may result in an emphasis of matter arising in audit reports relating to the valuation of energy generating assets due to significant uncertainty as to the future cash flows due to the implementation of the scheme.
Apart from the specific financial reporting consequences, the introduction of the CPRS will result in broader accounting considerations for entities including:
- Impairment of assets
- Adverse effects on cash flows
- Capital asset investment
- Accounting policies
- Reporting obligations
- Continuous disclosures for ASX listed companies
Tax Implications of the CPRS
Eligible Emission Units that are registered with the national registry will become property under the proposed laws to be enacted under CPRS. As a consequence of this, entities that are required to comply with the CPRS will need to consider the various income tax and GST implications of acquiring, trading in and surrendering Registered Emission Units (REUs). Based upon the Exposure draft of the Carbon Pollution Reduction Scheme (Consequential Amendments) Bill 2009, new provisions will be inserted into Australia's tax framework. This will provide for a rolling balance treatment for REUs similar to the trading stock provisions. Under the proposed CPRS taxation provisions:
- The cost of an REU would be deductible at the time of acquisition;
- The proceeds from selling an REU would be assessable income;
- Any difference in the value of the units held in the beginning
of an income year
and at the end of that year would be reflected in taxable income, this means:
- Any increase in value is included as assessable income; and
- Any decrease in value is allowed as a deduction.
Importantly, the exposure draft provides a specific carve out from the Capital Gains Tax regime and TOFA 3 & 4 in respect to the acquisition and disposal of REUs.
Trade in REUs will for the purposes of the GST Act, be considered a taxable supply. As such, entities that buy and sell REUs will charge GST and be able to claim input tax credits on the supply of REUs.
How can Moore Stephens help?
Our firm has considerable expertise in all facets of the legislation and has established the Carbon Emissions Services Group which brings together a range of experts to assist entities with dealing with reporting obligations in regards to greenhouse gas emissions. We can assist you in becoming NGER compliant through:
- Assisting management understand the key provisions of the NGER Act and implications for business. Providing assistance in applying the concepts defined in the NGER Act. This includes assistance with project plan development and formalising data collection and reporting processes through to the validation of captured data;
- Helping organisations determine their readiness to report including consideration of the systems and processes, internal controls and documentation required to report accurate, complete and auditable data;
- Providing assistance to establish an effective governance framework to support business operations and ongoing compliance with the NGER Act as well as future Emissions Trading Scheme Legislation;
- Providing expert accounting advice in relation to the accounting implications of the introduction of the CPRS;
- Providing independent audits of all reported disclosures; and
- Providing assistance in managing the various income tax and GST implications.
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